Banks Want U.S. to Back Mortgages

The financial services industry says the government has an essential role in mortgages.

WASHINGTON ( TheStreet) -- The financial industry doesn't want the government to exit the mortgage market, and with good reason: The government provides the liquidity, cost-efficiency and safety that the private market simply can't.

"The balance sheets of commercial banks cannot accommodate the amount of capital that is needed to maintain the mortgage finance system," Greg Baer, one of Bank of America's ( BAC) top lawyers told the Treasury Department in an official comment letter regarding housing-finance reform.

At a Treasury event on Tuesday to examine what ought to be done about Fannie Mae, Freddie Mac and other government-sponsored enterprises, that sentiment was echoed far and wide, by regulators and policy wonks as well.

All along the mortgage pipeline -- from bankers to securitization experts to buyers of mortgage-backed securities to Lewis Ranieri, the so-called "father" of those MBS -- all agreed that the government must stand behind the country's mortgage industry, if there is to be an industry at all in the near-term.

"An explicit guarantee will be required to ensure a reliable flow of mortgage credit," said Mike Heid, co-president of Wells Fargo Home Mortgage. Barbara Desoer, who holds a similar position at Bank of America said that while she doesn't foresee a need for GSEs to hold mortgage-backed securities in the long-term, guarantees will be a necessity.

Free-market conservatives have advocated an approach much different than the one supported by industry groups, which the Obama administration seems to be leaning toward. They would prefer to see the government completely exit the mortgage market, after winding down GSEs' existing obligations over a period of time.

But SIFMA, a coalition of securitization industry players, said in its comment letter that "abandoning" the mortgage market "would have serious and long term consequences for the global flow of capital to the United States."

Alan Boyce, who runs an overseas MBS venture called Absalon with hedge-fund manager George Soros , indicated that the whole mortgage-securitization market might collapse without a government backstop.

"It's very unlikely in the near future to be able to sell MBS in the United States without a government guarantee," said Boyce, a former senior executive at Countrywide Financial, the country's biggest mortgage originator at the height of the subprime bubble.